Thank you for standing by and welcome to the iQIYI Second Quarter 2023 Earnings Conference Call. All participants are in a listen-only mode. There will be a presentation followed by a question-and-answer session. [Operator Instructions] I would now like to hand the conference over to Chang You, IR Director of the Company. Please go ahead.

Thank you, operator. Hello, everyone and thank you for joining iQIYI second quarter 2023 earnings conference call. The Company's results were released earlier today and are available on the Company's Investor Relations website at ir.iqiyi.com. On the call today are Mr. Yu Gong, our Founder, Director and CEO; Mr. Jun Wang, our CFO; Mr. Xiaohui Wang, our CCO, Chief Content Officer; Mr. Wenfeng Liu, our CTO, Chief Technology Officer; Mr. Youqiao Duan, Senior Vice President of our Membership Business and Mr. Gang Wu of Senior Vice President of Brand Advertising Business. Mr. Gong will give a brief overview of the Company's business operations and highlights, followed by Jun, who will go through the financials. After the prepared remarks, management team will participate in the Q&A session. Before we proceed, please note that the discussion today will contain forward-looking statements, made under the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from our current expectations. Potential risks and uncertainties include but are not limited to, those outlined in our public filings with the SEC. iQIYI does not undertake any obligation to update any forward-looking statement except as required under applicable law. I will now pass on the floor to Mr. Gong. Please go ahead.

Hello everyone. Thank you for joining us today. Our focus of the quarter remains firmly on generating high-quality growth. Our original company strategy continues to deliver top-notch titles, which in turn brought the strongest second quarter performance in our history in terms of key metrics, such as total revenues, profits, free cash flow, and average daily subscribers during the quarter. Also, we maintain our industry-leading position of long run, key aspects the exception of quarterly results clearly demonstrates the resilient unmet demand, a long-term growth potential of our business. Now let me walk you soon to key developments in the second quarter. Firstly, we maintain our industry-leading position in dominant market share for six consecutive quarters according to enlighten our long-term drivers continue to pay major role in terms of company supply and the revenue contribution, both of which expecting [indiscernible] in them with record by excluding the 10,000 square in the shopping time. In addition, [indiscernible] such as 13 years of that [indiscernible] generated highly positive water of month reviews, really enforcing our brand image diversify on the high-quality premium content profile. Second, on our financial perspective, we have the best second quarter revenue performance in our history, up 17% year-over-year. We recorded double-digit annual revenue growth across all key business lines, membership services revenue grew 15% annually and advertising revenue grew 25% annually. Meanwhile non-GAAP operating income hit RMB786 million, grew by 129% annually, marking the six consecutive quarter of profitability. Furthermore, our ability to generate cash further strength with free cash flow reaching RMB872 million, positive for our consecutive quarters. Our performance in the second quarter represents another solid impact in our pursuit of high-quality growth. As we progress [indiscernible] iQIYI under the [indiscernible] industry have been completely transformed with rationalized competition, we have seen improving return…

Thanks, Mr. Gong, and hello, everyone. As Mr. Gong mentioned earlier, we recorded our best ever second quarter results across multiple key financial metrics, such as total revenues and current membership services revenue, while the profit and the free cash flow remained robust. In addition, our balance sheet healthiness was further improved. Now, let me walk you through key numbers. Total revenues increased by 17% annually to RMB 7.8 billion, setting an all-time high for second quarter performance. We secured double-digit annual revenue growth across all business segments. Membership services revenue continued to serve as the most powerful growth engine with revenue exceeding RMB4.9 billion, up 15% annually. Online advertising span up its growth as revenues reached RMB1.5 billion with an accelerated annual growth rate of 25%, which was filled by the growth in both brand and performance ads with performance ads being the key driver and to a lesser extent from brand advertisement. The content distribution revenue and other revenues rose by 15% and 16% respectively on annual basis as well. Moving on to cost and expenses, our cost of revenues increased by 10% annually among which content costs increased by 7% annually. This was primarily driven by an increase in number of original drama and variety shows launched during the quarter. Total operating expenses grew by 11% annually, largely due to the increase in SG&A expenses. We devoted more resources in marketing as we believe this could amplify our content influence, increase subscriber attraction and enhance the strong momentum generated by our original content offerings. Turning to profit and cash flow. Non-GAAP operating income reached RMB786 million, up 129% annually, positive for 6 consecutive quarters. Free cash flow reached RMB872 million positive for 4 consecutive quarters. During the quarter, as part of our liability management initiatives, we repurchased a total principal amount of $133.6 million, above our convertible senior notes due 2026. In addition, the total interest-bearing debt decreased significantly quarter-over-quarter. As of the annual second quarter, the Company has cash, cash equivalents, restricted cash, short-term investments and long-term restricted cash included in the prepayments and our assets totaling of RMB6.1 billion. To conclude, the second quarter results, once again, demonstrated that we are making solid progress in delivering high-quality growth, and we are well positioned to generate greater value for our stakeholders in the long run. For detailed financial data for the second quarter, please refer to our press release on our IR website. Now, we will open the floor for Q&A.

[Operator Instructions] Your first question comes from Xueqing Zhang of CICC. Please go ahead.

My question is related to the membership business. [indiscernible] stable growth in the past two quarters. So, what's the longer-term market for also how should we think about the outlook for the membership service in the second half of this year and longer term?

Thank you. We will invite Mr. Gong who's responsible for the [indiscernible] business to answer the question.

Our membership business developments have different focuses and strategies at different stages. In the initial establishment and rapid growth phase, the primary goal was to maximize the number of subscribers, which was focusing on growing the sub-base. When sub-base reached a significant size, for example, when our sub-base was first in the market that exceeded RMB 100 million in 2019, our objective shifted to membership revenue based on the market condition and our own strategy adjustment. So no longer purely just focus on some members. Our membership revenue is determined by the sub-base, subscriber lifetime and ARM. Our goal is not only to focus on the current quarter revenue but to achieve long-term and substantial growth in membership revenue, taking a more long-term perspective in business planning and improving the overall health of our membership business. In the future, we'll continue to adhere to the strategy we mentioned earlier. So first, we will continue to encourage subscribers to subscribe for a long period. Increasing the proportion of long-term subscribers, we have already seen continuous annual growth in the scale and also the percentage of annual subscribers, and we hope this trend will continue. Secondly, we will continue to systematically promote membership loyalty, particularly by enhancing the value perception of long-term subscribers. We have already implemented a series of measures for example. First, we provided discounted price and privileges for long-term subscribers, reinforcing our members understanding that the earlier and longer you subscribe the better. We introduced a membership loyalty program that contains membership point system, which favors long-term loyal subscribers. We believe this will improve user retention rate and enables the platform to generate mid- to long-term revenue from extended subscribing lifecycles. For example, we wrote out the recent the Lotus case for express package program, which was a meaningful application upgrade of our membership point. During the 8-day event, over 6 million subscribers have used their membership points to access that express package. Overall, we believe with the improvement in membership value perception, we believe that the membership of loyalty and retention will naturally increase, driving the long-term growth in ARM and also membership revenue.

Our next question will come from Lei Zhang of Bank of America Securities. Please go ahead.

We have seen that a key long form review player launched the several contents this summer with good performance. So, I want to see how should we look at the changing enrollment? And how should I see the competitive advantage in content perspective? On the same time, we noticed that offline entertainment actually saw strong recovery, especially movie. Do we see any impact or benefit to our business?

We will invite our CCO, Mr. Xiaohui Wang to answer this question.

For this summer, we've seen the industry have a better supply of it public content whether it's online dramas or offline theatrical whole movies. All of these are actually competing for users' attention. We are also pleased to see the flourishing of the long-form video industry. We believe with the improved content quality, the industry vitality has been activated, and we believe the market prosperity is beneficial for everyone. Under this backdrop, we have maintained our leading position in online drama driven by our high-quality original content. We have been leading the industry for six consecutive quarters in terms of the overall drama market share and also the exclusive market shares. Once again, we have with the test in Q2, which demonstrated our advantage and sustainability in the content business. Everyone knows the content industry is a long-term business. And the key to long-term success lies in the ability to continuously produce and supply high-quality content. In the core drama category, due to the nature of longer production cycle performance, our competitive advantage in this area is difficult to surpass in this quarter. Additionally, core market players are establishing different differentiated advantages, focusing on original content and exclusive content. As such, the content differentiation has been gracefully improved and the competition environment has been more benign and rational. We believe that our advantage in the content business are foreseeable and sustainable, supported by four strong pillars are mature and continuously improving content production mechanism, strong operating capabilities, leading technology capabilities and our top industry talent. In the future, we will continue to firmly adhere to innovation, premium content, diversification and continuously seeking new bits through innovation and research. Also, while ensuring the quality of projects, we will carefully plan our production to ensure a long-term entity sustainable supply of diverse premium content. Regarding the recovery of offline entertainment, on one hand, we will continue to focus on our strength, concentrating on the production and operation of our content online. On the other hand, the recovery of online theoretical movies will benefit online video platforms. The second window movie supply will recover and increase.

Our next question today will come from Alicia Yap of Citigroup. Please go ahead.

Wonder, if management could share with us what's your view on the overall brand advertising market outlook for the second half this year? Have you observed any major shift of budget sentiment from advertiser and will IT modify any of your advertising strategy?

We'll invite our Senior VP of Brand Ad Business, Wu Gang to answer the question.

IT is overall advertising business has been in a continuous recovery rate with brand advertising rebounded in Q2, growing both year-on-year and also quarter-on-quarter. After economy recovery takes time to reflect in the brand advertising market, we hold us cautiously optimistic attitude towards the brand advertising market for the second half of this year. Because we think IT is one of the platforms in the Chinese Internet industry that has the highest user quality as well as strong consumption power and a user's willingness to pay. So we are an indispensable choice for advertisers in enhancing their brand influence. We have being seen in increasing recognition from advertisers for our content and also innovative products. The content prime amount of content marketing overstatement has been driven by topnotch drama and variety shows and there have been a strong preference and acceptance from advertising for advertisers for our innovative ad products. Under the current macro environment, the advertisers from different factors are formulating corresponding advertising strategies based on the strategic vision, also the long-term market view among which certain brand advertisers with forward-looking strategic vision may increase their app spending, seizing marketing opportunities by opening the market. Looking at the specific sectors, we are optimistic for the food and beverage industry, cosmetic and personal care industries as well as the transportation industry, which also includes the new energy vehicle.

Our next question today will come from Lincoln Kong of Goldman Sachs. Please go ahead.

So, thank you management for taking my question. So my question is about performance at a pricing here. We have been seeing continued [indiscernible] for performance as in the first half, how do we think about the second half outlook of this set of business?

Thank you, Lincoln. I will invite our CTO, Wenfeng to answer this question.

For performance ad revenue has maintained its annual growth for five consecutive quarters, with the growth rate continues with actually the growth rate that continuously accelerating and its contribution in total ad revenue has continued to increase, reaching a historical high in Q2. It is expected that the performance ad structure will continue to experience strong growth in second half of this year, benefiting from our improved market capability, attracting more advertising budget from key industries such as internet services, e-commerce and gaming. Now also, we believe with the algorithm optimization and the support of generated AI performance app results will bring the outperformance and also monetization efficiency to improve. In the future, we think the performance app advertisers will pay more attention to cost effectiveness and also the advertising performance striving to achieve additional conversion and also to maximize returns on investment. Going forward, we will continue to strengthen app creativity, content personalization and interactivity. We will also leverage new technologies like generated AI to lower app production costs and also enhance and add delivery efficiency, adapting to the averaging market and user demand. From the ad sectors perspective, for the second half of this year, we think we have a positive outlook different sector, for example, the traditional e-commerce platform, live streaming e-commerce, culture and entertainment, harbor and tourism and also the lifestyle food industry.

Our next question will come from Maggie Ye of CLSA. Please go ahead.

Thank you management for taking my question. Noted the Company has generated very strong operating cash flow and free cash flow this quarter and has also repurchased convertible notes. Please, could you share with us more about your thoughts on the Company's debt level management and plans for financial resources in the coming quarters?

We will invite Mr. Jun, our CFO, to answer this question.

I think for the interest of time, I'll just answer the question English directly. So, I think this is a question that we constantly receive and the inquiry that we continue received from the investor community as well and our answer is very straightforward. First and foremost, we are in a productive continuously improving our capital structure. We are still making, trying every effort to make our balance sheet more healthier and more robust and this is what we do. And secondly, I think within our framework, doing that, there are two things that really matters. The first and the most important thing is actually to continuously generate sizable free cash flow. Just to remember, generating sizable cash flow means natural deleverage regardless of whether we will contact the debt buyback or not. And this is really a key and this is what we have been very proud to see our progress in the past couple of quarters. And the second thing is to develop a serious and comprehensive set of the choices to see what we can do to benefit our shareholders best. And these set of choices won't include, for example, the debt buyback, but it will also include to explore the opportunity to invest for safe returns. And as we all know, the external environment has been extremely dynamic with a rise in interest rate and actually provide return opportunities for the Company with free cash flow. So with that being said, I think our overall principle revenues remains the same. We explore every opportunity to create value for our stakeholders, including our shareholders and our supporting debt holders but without compromising the safety of our business for sure.

This will conclude our question-and-answer session. At this time, I'd like to hand back to management for closing remarks.

Thank you, everyone, for participating in the call today, and please do not hesitate to ask us if you have any further questions. Thank you and we will see you next quarter.

The conference has now concluded. Thank you for attending today's presentation, and you may now disconnect your lines.